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The ownership of ratings

Author

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  • Faure-Grimaud, Antoine
  • Peyrache, Eloic
  • Quesada, Lucia

Abstract

A prevalent feature in rating markets is the possibility for the client to hide the outcome of the rating process, after learning that outcome. This paper identifies the optimal contracting arrangement and the circumstances under which simple ownership contracts over ratings implement this optimal solution. We place ourselves in a setting where the decision to obtain a rating is endogenous and where the cost of such a piece of information is a strategic variable (a price) chosen by a rating agency. We then show that clients hiding their ratings can only be an equilibrium outcome if they are su±ciently uncertain of their quality at the time of hiring a certification intermediary and if the decision to get a rating is not observable. For some distribution functions of clients' qualities, a competitive rating market is a necessary condition for this result to obtain. Competition between rating intermediaries will unambiguously lead to less information being revealed in equilibrium.

Suggested Citation

  • Faure-Grimaud, Antoine & Peyrache, Eloic & Quesada, Lucia, 2007. "The ownership of ratings," LSE Research Online Documents on Economics 24485, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:24485
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    More about this item

    Keywords

    certification; corporate governance;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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